Weak ties to Europe good news for Canada: economists

A global economic recovery that boosted Canada's trade surplus in the first quarter could soon fade as the debt crisis in Europe drags on, but the Canadian economy will likely emerge with relatively few bruises, thanks to relatively weak ties to the old continent, economists say.

A CIBC world markets report released Friday said the problems plaguing so-called PIGS countries - Portugal, Ireland, Greece and Spain - will mean slower growth in Europe as they get their fiscal houses in order.

Toronto -

A global economic recovery that boosted Canada's trade surplus in the first quarter could soon fade as the debt crisis in Europe drags on, but the Canadian economy will likely emerge with relatively few bruises, thanks to relatively weak ties to the old continent, economists say.

A CIBC world markets report released Friday said the problems plaguing so-called PIGS countries - Portugal, Ireland, Greece and Spain - will mean slower growth in Europe as they get their fiscal houses in order.

That will take a modest toll on strengthening Canadian exports and commodities, which were showing signs of major improvement before massive debt problems in Greece began to wreak havoc on international markets late last month, the report said.

Canadian exports rose more than imports in the opening quarter of 2010, suggesting Canadian trade was accelerating - helped especially by a growing surplus with No. 1 trade partner the United States. Statistics Canada reported Friday that Canada's goods surplus hit $1.7 billion in the first quarter of 2010, as the goods surplus with United States continued to expand for the second quarter in a row last two quarters.

The country's seasonally adjusted deficit on current transactions with the rest of the world narrowed to $7.8 billion from $10.2 billion in the fourth quarter of 2009, thanks to a larger trade in goods surplus and a reduced deficit on international travel.

An increase in purchases of Canadian securities and foreign direct investment in Canada suggested investor confidence in Canada's relatively stable currency, banking system and domestic economy.

Douglas Porter, deputy chief economist at Bank of Montreal (TSX:BMO) said the current account deficit narrowed in the first quarter more than economists had expected.

"The bigger story here was that the non-merchandise components were all better than expected. The services deficit narrowed slightly on a smaller travel shortfall (partly thanks to the winter Olympics), and the gap on both investment income and net transfers also narrowed."

Another good sign for the resource-powered economy was Scotiabank's monthly commodity price index, which climbed 4.2 per cent in April amid higher prices for metals and minerals.

But the bank warned this could be the "high-water mark" for 2010 and other economists say sluggishness in the European economy will have an indirect impact on Canadian growth as it continues to dampen demand for months to come.

While Europe is far from Canada's largest trading partner, events there are reverberating around the world as global connections amplify local crises and spread quickly from one corner of the world to another.

Slow growth in Europe could halt some manufacturing in Asia, where Canadian raw materials - from copper to lumber - have been in high demand, contributing to higher commodity prices and improving performances from Canada's resource sector.

But CIBC economist Krishen Rangasamy said Canadian trade figures are expected to outperform most other countries, given its relatively weak linkages with Europe, which accounts for only four per cent of total Canadian exports.

"Unlike the tie to the U.S., when Europe sneezes, Canada does not necessarily catch a cold. That's because trade linkages between Canada and the old continent are not as vital as the ones we have with the U.S.," Rangasamy said.

"The overall impact resulting from softer growth in Europe or a weaker euro is unlikely to do much to derail Canada's recovery."

However, he added, slow growth in Europe could have larger indirect effects on Canada.

"For instance, economies with bigger exposures to Europe, such as Asia, will be somewhat slower as a result, cutting into volumes and prices for Canada's exports."

In the long run, Canada's rich resources, resilient financial system and favourable demographics relative to other G7 nations are a foundation for a strong economy over the next five to 10 years, CIBC economist Avery Shenfeld said in a note to clients.

"The country's relative resource abundance, lighter government deficit burden and demographic options could collectively play out in superior performance for equity investors," he wrote in a report.

"Canada is well-positioned to outpace the typical major industrialized economy in the coming half decade, having less gross debt, and much less net debt, than most others."